Working Capital
The short-term capital available to run day-to-day operations.
Formula
Variables
Example
$150k − $75k = $75k working capital
How it works
Working capital shows how much of a business’s short-term resources remain after covering short-term obligations. It works by subtracting current liabilities from current assets because only assets that can be turned into cash soon are available to pay debts due soon. A positive result usually means the business can meet its near-term bills without relying on long-term financing.
When to use it
Use this formula when checking a company’s short-term liquidity or deciding whether it can comfortably pay suppliers, wages, rent, and other immediate expenses. It is commonly used in financial analysis, cash-flow planning, and comparing the day-to-day financial health of different businesses.
Worked example, step by step
Current Assets = $240,000 Current Liabilities = $165,000 Working Capital = Current Assets - Current Liabilities Working Capital = $240,000 - $165,000 Working Capital = $75,000 So, the business has $75,000 of working capital.
Common mistakes to avoid
- Including long-term assets or long-term debts in the calculation
- Assuming higher working capital always means better performance without checking how efficiently assets are used
- Forgetting that negative working capital means current liabilities are greater than current assets
Did You Know?
Negative working capital is not always bad — fast-turnover retailers like supermarkets often run on it.
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More in Accounting
View allAccounting Equation
BasicThe foundation of double-entry bookkeeping: everything a business owns is financed either by debt or by owners’ capital.
Cost of Goods Sold
BasicThe direct cost of the inventory actually sold during a period.
Gross Profit
BasicWhat remains from sales after subtracting the direct cost of the goods sold, before operating expenses.
Net Income
BasicThe “bottom line” — total earnings after all expenses, interest and taxes are deducted from revenue.
Retained Earnings
BasicCumulative profit kept in the business rather than paid out to shareholders.
Current Ratio
IntermediateA liquidity measure of whether a firm can cover its short-term obligations with short-term assets.